GIFT   OF 


GIFT 

RAILROAD 

CORPORATE  ACCOUNTING 
DURING  FEDERAL  CONTROL 


BY  FRANK  NAY 

Vice-President  and  Comptroller 

Chicago,  Rock  Island  and  Pacific  Railway  Co. 


An  address  delivered  at  the  31st  annual  meeting  of  the 

Railway   Accounting    Officers   Association 

New  York  City,  June  1 1  and  12,1919 


THIS  PAMPHLET  IS  PUBLISHED  AND  DISTRIBUTED  BY  THE 

RAILWAY  ACCOUNTING  OFFICERS   ASSOCIATION 

1116    WOODWARD    BUILDING 

WASHINGTON,   D.   C. 


RAILROAD    CORPORATE    ACCOUNTING    DURING 
FEDERAL  CONTROL 

Frank  Nay 

The  United  States  Government  took  possession  of  the 
railroads  of  the  United  States  under  proclamation  of  President 
Woodrow  Wilson,  at  12  o'clock  noon,  on  December  28,  1917, 
but  for  the  purposes  of  accounting,  the  possession  dated  from 
12  o'clock  midnight  on  December  31, 1917.  Mr.  W.  G.  McAdoo, 
Secretary  of  the  Treasury  of  the  United  States,  was  appointed 
by  the  President,  Director  General  of  Railroads,  and  Mr. 
McAdoo's  General  Order  No.  1,  issued  under  date  of  Decem- 
ber 29,  1917,  provided  that  all  officers,  agents  and  employes 
of  the  transportation  systems,  should  continue  in  the  perform- 
ance of  their  regular  duties,  reporting  to  the  same  officers  as 
theretofore,  and  on  the  same  terms  of  employment.  General 
Order  No.  2  issued  on  the  same  date,  reads  as  follows : 

General  Order  No.  2. 

Washington,  D.  C,  December  29,  1917. 
To  the  Chief  Executives  of  the  Railroads : 

Pursuant  to  the  authority  vested  in  me  by  the  President  of  the  United 
States  in  his  proclamation  of  December  26,  1917,  wherein  it  was  stated 
that  for  purposes  of  accounting,  possession  and  control  of  the  railroads 
shall  date  from  12  o'clock  midnight  on  December  31,  1917,  you  are 
notified  that,  until  othenyise  directed,  no  changes  in  the  present  methods 
of  accounting  as  prescribed  by  the  Interstate  Commerce  Commission 
will  be  required.  The  accounts  of  your  respective  companies  shall  be 
closed  as  of  December  31,  1917,  and  opened  as  of  January  1,  1918,  in 
the  same  manner  as  they  have  heretofore  been  handled  at  the  close  of 
one  fiscal  period  and  the  beginning  of  another,  and  in  the  same  manner 
that  you  should  have  handled  your  accounts  had  the  Government  not 
taken  possession  and  control. 

WILLIAM  G.  McADpo, 
Director  General  of  Railroads. 

Under  that  general  order,  the  railroad  accounting  officers 
handled  both  corporate  and  Federal  accounts ;  in  fact,  at  that 
time  they  had  no  knowledge  as  to  the  difference  between  a 
corporate  account  and  a  Federal  account.  They  continued,  for 
several  months,  to  perform  their  duties  exactly  as  prior  to 
Federal  control.  January  1st  being  the  beginning  of  the  cal- 
endar year  and  of  the  fiscal  year  established  by  the  Interstate 
Commerce  Commission,  was  the  most  propitious  day  on  which 
to  inaugurate  the  period  of  Federal  control.  Naturally  the 

4.15451 


•••:•••   :  ..:.•••.-..•       2 

accounts  for  the  year  1917  separated  themselves  from  the  ac- 
counts for  the  year  1918,  barring  certain  over-lapping  items 
which  will  be  considered  later. 

Corporate  and  Federal  Accounts. 

For  some  months  there  was  indecision  as  to  whether  or  not 
it  was  necessary  to  make  a  complete  separation  of  the  accounts, 
such  as  has  since  been  decided  upon.  The  undersigned  was 
asked  by  an  official  of  the  United  States  Railroad  Administra- 
tion if  he  could  fairly  and  impartially  keep  the  accounts  of 
the  road  which  he  represented,  for  the  corporation  and  for 
the  Director  General,  and  give  a  square  deal  to  both.  The 
answer  was  in  the  affirmative,  and  reference  was  made  to  the 
many  joint  agencies  of  various  kinds  existing  all  over  the 
United  States,  rilled  by  men  who  have  for  years  been  serving 
two  or  more  railroad  companies,  and  have  been  giving  each 
railroad  company  served,  a  square  deal.  However,  further 
consideration  of  the  matter  led  the  Administration  officials  to 
the  conclusion  that  it  was  desirable  and  necessary  to  have  not 
only  a  complete  separation  of  the  accounts  between  the  cor- 
porate accounts  and  those  of  the  Administration,  but  that  they 
should  be  administered  by  separate  accounting  forces,  in 
charge  of  separate  accounting  officers ;  or,  to  put  it  another 
way,  the  Administration  desired  to  have  their  accounts  kept 
by  men  who  were  100%  Administration,  and  who  had  no 
official  connection  with  the  corporations.  With  this  in  mind, 
General  Order  No.  17  was  issued,  under  date  of  April  3,  1918. 
This  order  provided  for  a  complete  separation  of  the  accounts 
of  the  corporation  from  those  of  the  Director  General,  and 
required  that  they  be  written  in  separate  sets  of  books.  This 
was  done,  and  when  the  work  was  completed,  the  corporate 
books  were  turned  over  to  the  corporation,  and  it  was  then 
necessary  for  the  corporation  to  have  an  accounting  officer  who 
would  take  charge  of  the  corporate  books,  as  the  accounting 
officers  of  the  Administration  were  prohibited  from  keeping 
them  further  without  special  permission  from  the  Admin- 
istration. 

Corporate  Accounting  Departments  Organised. 

About  July  1,  1918,  the  separation  of  the  sheep  from  the 
goats  began.  At  that  time  Federal  Managers  were  appointed 
for  the  various  railroads,  complete  Federal  organizations  were 
established  and  the  Federal  officers  were  required  to  sever  all 


connections  with  the  railroad  corporations,  as  officers,  di- 
rectors, or  otherwise.  That  action  obliged  the  corporations  to 
create  organizations  entirely  separate  .and  distinct  from  the 
Federal  organizations.  One  of  the  first  essentials  of  the 
separate  corporations  was  adequate  provision  for  corporate 
accounting,  because  it  was  extremely  important  that  the  ac- 
counts of  the  corporation  should  be  given  proper  attention. 
As  illustrating  how  the  corporate  executives  felt,  I  quote  the 
following  from  a  letter  dated  October  26,  1918,  from  Mr. 
Samuel  Rea,  President  of  the  Pennsylvania  Railroad  Com- 
pany, addressed  to  a  number  of  Presidents  of  other  large 
railroad  companies,  in  connection  with  the  proposed  forma- 
tion of  a  corporate  railway  accounting  officers'  conference: 

You  will  appreciate  that  the  contract  is  in  large  part  an  accounting 
matter.  It  lays  down  the  general  basis  and  principles  of  the  relation 
with  the  Government,  but  the  details  for  carrying  it  out  will  devolve 
largely  upon  the  Accounting  Officers. 

I  imagine  very  few  corporate  accounting  officers  at  first  had 
any  grasp  upon  the  conditions  and  situations  which  confronted 
them.  I  confess  to  you  that  when  I  was  appointed  corporate 
accounting  officer,  or  rather,  retained  in  that  position,  because 
no  change  was  made  in  my  title  and  no  change  in  my  duties, 
except  the  separation  of  accounts  relieved  me  from  the  detail 
of  the  operating  accounts — I  said  to  my  assistant,  something 
like  the  following:  "Joe,  I  believe  you  and  I  can  handle  the 
corporate  accounts  for  the  Rock  Island ;  there  will  not  be  very 
many  journal  vouchers,  and  we  may  have  to  get  a  clerk  or  two 
to  work  on  the  subsidiary  accounts  and  check  the  lap-overs, 
but  you  and  I  can  do  the  general  work  without  any  difficulty 
at  all ;  in  fact,  I  rather  welcome  the  idea  of  getting  a  chance 
to  make  some  entries  on  the  books  again ;  it  has  been  so  many 
years  since  I  actually  took  my  pen  in  hand  to  make  entries  on 
ledgers." 

Today  I  have  in  my  corporate  accounting  office  for  the 
Rock  Island,  34  clerks;  they  are  all  kept  busy  and  many  of 
them  are  working  overtime.  By  actual  count  we  record  just 
as  many  journal  vouchers  on  our  books  as  prior  to  Federal 
control.  Up  to  this  time  I  have  not  personally  made  any 
entries  on  the  books  and  it  looks  as  if  I  would  not  be  able  to 
do  so  during  Federal  control ;  in  fact,  I  give  you  my  word  that 
I  have  never  worked  harder  in  my  life  than  during  the  last 
year,  and  I  may  add,  I  have  never  had  less  to  show  for  hard 
work. 


In  taking  up  this  corporate  accounting  work,  we  had  an  en- 
tirely new  proposition.  None  of  us  had  had  experience  with 
a  similar  accounting  situation,  and  we  had  to  blaze  the  trail. 
We  were  also  confronted  with  the  difficulty  of  obtaining  ade- 
quate and  competent  help.  The  very  cream  of  the  young 
railroad  men  of  our  country  had  eagerly  offered  the  supreme 
sacrifice  to  help  win  the  war,  and  there  was  a  great  shortage 
in  railroad  accountants. 

Compilation  of  Standard  Return. 

One  of  the  first  things  to  which  the  attention  of  the  cor- 
porate accounting  officer  was  applied,  was  the  compilation  of 
data  to  demonstrate  prior  to  the  signing  of  the  contract  cover- 
ing Federal  control,  whether  or  not  the  average  net  railway 
operating  income  as  reported  to  the  Interstate  Commerce  Com- 
mission for  the  three  years  ended  June  30,  1917,  was  the  true 
income  for  that  period.  It  should  be  stated  that  the  Presi- 
dent's proclamation  hereinbefore  referred  to,  was  followed 
by  an  Act  of  Congress,  approved  on  March  21,  1918,  which, 
among  other  things,  fixed  the  compensation  to  be  paid  to  the 
railroad  corporations  for  the  use  of  their  property  during 
Federal  control,  at  the  average  net  railway  operating  income 
for  the  three-year  period  ended  June  30,  1917,  called  the  "Test 
Period."  It  is  a  matter  of  common  knowledge  that  owing  to 
the  voluminous  details,  the  frequent  negotiations  of  contracts 
or  arrangements  which  are  made  effective  prior  to  the  date 
on  which  the  agreements  are  executed,  construction  of  addi- 
tional lines  and  additions  and  betterments,  congestion  of  traf- 
fic, etc.,  the  net  railway  operating  income  as  reported  to  the 
Interstate  Commerce  Commission  for  any  period,  is  not  an 
exact  figure,  such  as  contemplated  by  the  President  and  Con- 
gress in  their  utterances.  If  the  figure  for  any  such  period 
should  be  revised  and  completed  in  accordance  with  later  and 
more  accurate  information,  the  net  income  might  be  greater 
or  less  than  the  amount  originally  stated.  It  is  assumed  that 
when  the  President  issued  his  proclamation  and  when  Con- 
gress passed  the  Act  of  March  21,  1918,  fixing  as  the  com- 
pensation for  the  use  of  the  railways,  the  average  annual  net 
railway  operating  income  for  the  three  years  ended  June  30, 
1917,  the  actual  net  income  as  nearly  as  might  be  ascertained 
without  completely  re-working  all  of  the  detailed  figures,  was 
intended.  In  the  case  of  carriers  where  that  net  figure  was 
over-stated,  due  to  the  omission  of  some  charge  or  to  an  ex- 


cessive  credit,  which  would  be  adjusted  in  a  subsequent  period, 
unless  adjustments  are  made,  such  carriers  would  receive  a 
rental  in  excess  of  the  amount  intended  by  the  President  and 
by  Congress.  In  the  case  of  a  carrier  whose  net  income  as 
stated  to  the  Interstate  Commerce  Commission  for  the  period 
named,  was  less  than  the  actual  figure,  due  to  items  similar 
to  those  hereinbefore  mentioned,  such  a  carrier  would  be 
underpaid  unless  proper  adjustment  was  made.  As  the  Inter- 
state Commerce  Commission  was  required  to  certify  to  the 
President,  the  average  net  railway  operating  income  for  the 
three  years  ended  June  30,  1917,  it  would  seem  natural  that 
the  Interstate  Commerce  Commission  would  make  an  effort  to 
locate  the  relatively  important  items  which  should  be  adjusted 
and  thus  produce  a  net  figure  which  would  more  nearly  repre- 
sent the  actual  net  railway  operating  income  than  the  one 
which  was  reported  to  the  Commission. 

It  should  be  said  right  here  that  when  the  statement  is  made 
that  the  net  operating  income  reported  to  the  Commission, 
is  not  the  actual,  the  impression  must  not  be  created  that  any 
intentional  omissions  or  errors  were  made  or  that  the  net 
figure  that  was  stated  was  intentionally  greater  or  less  than 
the  actual,  but  owing  to  the  large  volume  of  items  entering  into 
the  net  operating  income  of  the  carrier  during  the  year,  or 
during  the  three-year  period,  and  the  complications  in  connec- 
tion therewith,  it  is  a  practical  impossibility  to  state  the  net 
income  of  the  carrier  on  an  actual  basis  within  the  time  pre- 
scribed for  rendering  the  reports. 

Along  in  the  summer  of  1918,  the  Interstate  Commerce 
Commission  became  aware  that  certain  carriers  had 
included  in  their  accounts,  subsequent  to  June  30,  1917, 
certain  Adamson  law  payments,  which  accrued  prior  to  June 
30,  1917,  and  should  have  been  charged  against  the  expenses 
of  the  three-year  period  ended  June  30,  1917.  Further,  they 
were  aware  of  the  fact  that  under  the  income  or  war  tax  law 
of  October,  1917,  the  carriers  could  not  possibly  have  included 
the  taxes  under  that  law  which  accrued  during  the  first  six 
months  of  the  year  1917,  in  the  accounts  for  that  period.  The 
very  fact  that  the  law  was  not  enacted  until  more  than  three 
months  after  the  close  of  the  period,  precludes  the  possibility 
of  including  the  figures  within  the  period.  Therefore,  the 
Interstate  Commerce  Commission  sent  out  a  communication  to 
the  chief  accounting  officers  of  the  various  carriers,  requesting 
them  to  modify  their  previous  reports  of  the  net  railway  op- 
erating income  for  the  three  years  ended  June  30,  1917,  by 


6 

deducting  therefrom  such  omitted  Adamson  law  payments  as 
had  accrued  within  that  period,  and  also  by  deducting  there- 
from one-half  of  the  war  taxes  under  the  Act  of  October, 
1917,  for  the  year  1917.  This  action  was  commendable  and  in 
harmony  with  the  spirit  to  determine  a  figure  for  the  net 
railway  operating  income  for  the  three  years  ended  June  30, 
1917,  which  should  be  as  nearly  as  practicable  the  actual  figure 
for  that  period.  The  carriers  responded  with  the  corrections 
requested,  and  then  later,  certain  carriers  called  to  the  attention 
of  the  Interstate  Commerce  Commission  items  which  were  er- 
roneously included  as  a  charge  against  the  net  income  of  the 
test  period,  and  to  revenue  which  was  erroneously  omitted 
from  that  of  the  test  period;  the  adjustments  requested  would 
have  the  effect  of  increasing  the  net  railway  operating  income 
for  the  test  period.  However,  the  Interstate  Commerce  Com- 
mission declined  to  make  any  further  adjustments  unless  it 
could  be  shown  that  the  accounting  rules  of  the  Interstate 
Commerce  Commission  had  been  violated.  The  Interstate 
Commerce  Commission  initiated  the  move  to  decrease  the  net 
railway  operating  income  by  deducting  therefrom  the  two 
items  mentioned — the  omitted  Adamson  law  payments  and  the 
one-half  of  the  1917  war  taxes,  neither  of  which  constituted  a 
violation  of  the  accounting  rules  of  the  Interstate  Commerce 
Commission,  but  the  Commission  has  so  far  declined  to  make 
adjustment  of  similar  items  subsequently  brought  to  their 
attention. 

Lap-overs.. 

Under  General  Order  No.  17,  certain  items  affecting  the 
income  accounts  of  the  corporations  prior  to  midnight  of  De- 
cember 31,  1917,  were  classed  as  lap-overs.  On  the  expense 
side,  these  lap-overs  were  very  clearly  defined  by  General 
Order  No.  17,  and  accounting  bulletins  and  circulars.  They 
referred  to  all  payments  by  the  Director  General  for  expenses 
which  were  incurred  prior  to  January  1,  1918,  which  if  they 
had  been  paid  prior  to  Federal  Control,  would  have  been 
charged  to  operating  expenses  or  income  account  of  the  cor- 
poration prior  to  such  control.  In  other  words,  the  lap-over 
expense  items  were  allocated  according  to  the  date  on  which 
the  service  was  performed  or  the  liability  incurred. 

The  general  orders  and  circulars  of  the  U.  S.  Railroad 
Administration  provided  that  such  lap-overs  would  be  paid  by 
the  Administration,  and1  charged  against  the  railroad  corpora- 
tions, and  that  the  railroad  corporations  would  simultaneously 


credit  the  U.  S.  Railroad  Administration  on  the  corporate 
books.  This  is  an  entirely  equitable  method  of  handling 
these  lap-overs  as  the  Administration  had  taken  over  the  cash 
on  hand  January  1,  1918,  and  had  collected  all  operating  funds 
accruing  to  the  corporations  on  and  after  that  date;  in  fact, 
the  Administration  collected  all  moneys,  whether  operating  or 
corporate,  that  accrued  to  the  corporations  for  several  months 
after  the  beginning  of  Federal  control,  and  naturally,  it  was 
incumbent  upon  the  Administration  to  pay  the  liabilities  of  the 
corporations. 

On  the  revenue  side,  however,  the  lap-overs  have  not  been 
clearly  and  equitably  defined.  In  General  Order  No.  17  it 
was  provided  that  the  Administration  would  continue  to  reve- 
nue the  freight,  passenger  and  other  traffic  in  the  same  manner 
that  the  corporation  had  accounted  for  such  revenue,  taking 
into  the  Administration  treasury,  the  revenue  that  would  have 
accrued  to  the  corporation  in  the  months  during  Federal  con- 
trol. As  to  passenger  service,  the  revenue  on  which  is  accrued 
largely  on  a  forwarded  basis  the  corporations  are  credited  with 
more  than  their  proper  proportion  of  the  revenue  on  lap-over 
passenger  traffic.  The  average  journey  per  passenger  is  shown 
in  the  reports  of  the  Interstate  Commerce  Commission  to  be 
anywhere  from  20  miles  to  100  miles  in  the  different  sections 
cf  the  United  States,  and  therefore,  on  the  average,  because 
of  the  short  journeys  and  because  passengers  do  not  become 
congested  at  terminal  points,  like  freight,  the  method  of  deter- 
mining passenger  lap-overs  as  prescribed  in  General  Order 
No.  17  does  not  miss  the  mark  very  far,  but  as  heretofore 
stated,  it  is  not  exact,  and  is  on  more  or  less  of  a  hit-or-miss 
basis.  However,  neither  the  revenues  of  the  corporations  nor 
the  revenues  of  the  Administration  would  be  seriously  affected 
by  the  application  of  General  Order  No.  17  to  the  passenger 
business,  assuming  that  exactly  the  same  method  of  ticketing 
passengers  and  of  accounting  for  passenger  revenue  wTill  pre- 
vail at  the  end  of  Federal  control  as  at  the  beginning  of  Fed- 
eral control. 

As  to  the  freight  traffic,  the  method  proposed  in  General 
Order  No.  17  of  revenuing  freight  at  the  beginning,  during 
and  at  the  end  of  Federal  control,  in  accordance  with  the  prac- 
tices of  the  carrier  prior  to  Federal  control  would  cause  cer- 
tain carriers  or  corporations  to  suffer  heavy  losses  in  their 
revenues,  and  the  U.  S.  Railroad  Administration  to  have  the 
advantage  of  similar  gains.  At  the  time  that  the  railroads 
were  taken  over  by  the  Administration,  freight  was  interrupted 


8 

en  route  and  congested  at  many  terminal  points.  This  was 
due  to  the  increased  movement  of  traffic  on  account  of  trans- 
portation for  the  War  and  Navy  Departments  and  by  orders 
given  to  expedite  the  movement  of  certain  classes  of  traffic, 
which  resulted  in  the  delay  and  congestion  of  other  classes  of 
traffic.  In  fact,  at  December  31,  1917,  there  was  an  unusual 
congestion  and  freight  was  delayed  en  route  to  a  much  greater 
extent  than  in  the  ordinary  course  of  business,  and  the  accrued 
earnings  on  such  freight  delayed  en  route,  amounted  to  many 
millions  of  dollars.  In  the  case  of  the  few  railroads  which 
accrue  their  freight  revenues  on  the  "forwarded"  basis,  that 
is  to  say,  those  which  put  into  their  revenue  and  income  ac- 
count the  earnings  when  the  freight  starts  on  its  journey,  these 
congestions  would  have  no  effect,  but  the  large  majority  of 
roads  which  accrue  their  revenue  on  a  "received"  basis,  that 
is  to  say,  those  which  credit  their  revenue  or  income  account 
when  the  freight  arrives  at  destination  and  the  transportation 
service  is  complete  and  the  contract  fulfilled,  would  suffer  a 
very  large  loss  of  revenue  under  the  provisions  of  General 
Order  No.  17.  Of  course,  the  losses  to  the  corporations  would 
be  minimized,  if  the  congestion  at  the  close  of  Federal  control 
should  be  as  great  as  at  the  beginning  of  Federal  control — a 
condition  which  is  scarcely  possible  because  at  the  close  of 
Federal  control,  under  peace  conditions,  there  will  not  be  the 
enormous  volume  of  traffic  and  priority  orders  that  caused  the 
congestion  and  delay  which  existed  at  the  beginning  of  Fed- 
eral control.  However,  as  to  lap-overs,  that  order  was  framed 
on  an  unsound  accounting  basis,  and  provided  a  hit-or-miss 
division  of  the  freight  revenue  between  prior  or  corporation 
account,  and  the  accounts  of  the  Federal  Administration.  This 
condition  was  later  modified  by  the  contract,  see  Section  4, 
paragraph  (b),  and  by  accounting  circular  No.  53  of  Decem- 
ber 2,  1918.  The  accounting  circular  No.  53  is  still  on  a  hit- 
or-miss  basis,  although  it  does  provide  for  an  adjustment  of 
certain  delayed  carload  shipments  which  had  reached  destina- 
tion prior  to  Federal  control  but  the  accounting  delayed 
until  during  Federal  control.  However,  accounting  circular 
No.  53  does  not  take  care  of  the  large  number  of  shipments — 
carload  and  less  than  carload — that  were  delayed  in  transit 
which  had  not  reached  destination  at  December  31,  1917. 
Take  for  example  a  carload  shipment  moving  via  the 
Baltimore  and  Ohio  Railroad  from  Chicago  to  Baltimore, 
which  reached  Pittsburg  in  December,  1917,  and  lay  there 
until,  say  January  10,  1918,  when  it  moved  out  to  desti- 
nation, the  settlement  being  made  on  the  "received"  basis. 


9 

The  Baltimore  and  Ohio  Railroad  included  in  its  operating 
expenses,  the  cost  of  transporting  that  shipment  from  Chicago 
to  Pittsburg,  but  never  have,  and  according  to  the  present 
attitude  of  the  Railroad  Administration,  never  will  receive  a 
dollar  for  such  transportation.  An  offset  will  result  at  the 
end  of  Federal  control  if  a  similar  car  is  en  route  from  Chicago 
to  Baltimore,  reaches  Pittsburg  just  prior  to  the  end  of  Fed- 
eral control,  and  lays  there  until  after  the  end  of  Federal 
control,  and  then  moves  to  destination  after  Federal  con- 
trol, the  revenue  being  taken  into  the  accounts  of  the  corpora- 
tion after  Federal  control.  If  a  sufficient  number  of  such 
cars  move  just  prior  to  the  end  of  Federal  control,  to  produce 
the  same  lap-over  revenue  as  that  produced  by  delayed  cars 
which  moved  just  prior  to  the  beginning  of  Federal  control, 
there  would  be  an  offset,  but  considering  the  congestion  that 
existed  at  the  time  the  railroads  were  taken  over,  and  that 
probably  there  will  be  no  congestion  at  the  end  of  Federal 
control,  it  is  inconceivable  that  there  will  be  anything  like  the 
number  of  such  cars  en  route  at  the  end  of  Federal  control 
as  at  the  beginning  of  Federal  control.  It  has  been  urged  that 
to  make  a  separation  of  the  accounts  between  the  carriers, 
would  require  additional  clerical  expense,  and  of  course,  it- is 
true  that  to  prepare  an  account  accurately  requires  more  cler- 
ical work  than  to  guess  at  it.  It  is  my  judgment  that  the  rail- 
roads as  a  whole  will  lose  millions  of  dollars  because  of  the 
failure  to  separate  the  freight  revenues  at  the  beginning  and 
at  the  end  of  Federal  control  on  the  basis  of  the  service  per- 
formed ;  that  is  to  say,  take  the  case  of  the  shipment,  Chicago 
to  Baltimore,  hereinbefore  referred  to ;  the  revenue  from 
Chicago  to  Pittsburg  should  have  been  credited  to  the  cor- 
poration because  the  expense  of  that  haul  was  charged  to  the 
corporation,  and  only  the  revenue  from  Pittsburg  to  Baltimore 
should  have  been  credited  to  the  Federal  Administration  be- 
cause the  Administration  paid  the  expense  of  that  haul.  The 
increase  of  25%  in  freight  rates  would  require  that  80%  of 
the  freight  that  was  delayed  en  route  at  December  31,  1917, 
should  be  delayed  en  route  at  the  end  of  Federal  control ;  that 
is  to  say,  where  there  were  100,000  lap-over  cars  from  certain 
points  to  certain  points  delayed  in  transit  at  certain  points, 
at  December  31,  1917,  there'  should  be  80,000  lap-over  cars 
from  the  same  points  to  the  same  points,  delayed  in  transit  at 
the  same  points,  at  the  end  of  Federal  control  in  order  to  give 
the  corporation  an  erroneous  credit  which  would  offset  the 
erroneous  credit  given  the  Railroad  Administration  at  the 


10 

beginning  of  Federal  control.  If  there  should  be  less  than 
80%  of  such  cars  delayed  in  transit  at  the  end  of  Federal 
control,  the  corporation  loses  revenue ;  if  there  should  be  more, 
it  will  gain  revenue,  but  such  methods  are  unbusinesslike  and 
are  not  good  accounting  methods.  I  daresay  that  the  account- 
ing between  the  U.  S.  Railroad  Administration  and  the  War 
Department,  Navy  Department,  or  any  other  department  of 
the  same  Government,  is  not  conducted  on  a  basis  as  loose  as 
that.  Of  course,  as  to  the  less  than  carload  shipments,  the 
average  haul  is  shorter,  the  amount  of  money  involved  is 
smaller,  and  the  expense  of  separation  is  greater.  The  majority 
of  the  less  than  carload  shipments  of  freight  are  handled  on 
the  "received"  basis,  while  the  passenger  business  is  handled 
on  the  "forwarded"  basis.  The  less  than  carload  business 
might  be  ignored  and  any  loss  to  the  corporation  thereon  be 
considered  as  an  offset  against  the  gain  in  the  passenger  busi- 
ness. In  those  two  cases,  the  amount  of  revenue  involved 
would  be  comparatively  small,  and  although  it  is  unbusiness- 
like not  to  make  any  attempt  at  a  separation  on  the  basis  of 
service  performed,  yet  accountants  must  be  practical,  and 
where  the  expense  is  liable  to  be  more  than  the  amount 
involved  in  a  separation  of  accounts  between  the  railroad  and 
the  Government  during  the  time  of  war,  there  would  be  no 
serious  objection  to  waiving  the  strict  accounting  practices  in 
such  cases.  However,  the  expense  of  apportioning  the  revenue 
on  carload  shipments  substantially  in  accordance  with  the 
service  performed,  would  not  be  seriously  burdensome  and 
where  millions  of  dollars  are  involved,  good  accounting  and 
businesslike  methods  should  not  be  sacrificed. 

Another  question  regarding  these  lap-overs  relates  to  the 
proper  accounts  to  be  charged  and  credited  by  the  corporation 
after  the  amounts  have  been  determined.  A  bulletin  was  put 
out  by  the  Committee  on  General  Accounts  of  this  Associa- 
tion, stating  that  Mr.  Alexander  Wylie,  Chief  Examiner  of 
Accounts,  of  the  Interstate  Commerce  Commission,  had  ruled 
that  these  lap-over  expenses  and  lap-over  revenues  should  be 
charged  and  credited  to  the  income  accounts  of  the  carriers, 
while  a  large  number  of  railroad  accounting  officers  maintain 
that  they  should  be  charged  and  credited  to  the  profit  and 
loss  accounts  of  the  carriers.*  The  theory  on  which  the  in- 
structions to  charge  and  credit  the  income  account  is  that  if 
the  corporation  had  been  operating  the  properties,  these  items 
would  have  been  taken  into  the  income  account  under  the 

*At  the  meeting  at  which  this  paper  was  read  the  Railway  Accounting  Officers 
Association  voted  in  favor  of  charging  and  crediting  these  prior  items  to  Profit 
and  Loss. 


11 

head  of  operating  expenses,  operating-  revenues,  etc.  In  other 
words,  the  decision  is  based  on  an  "if"  statement,  but  the  "if" 
goes  the  wrong  way.  The  corporations  are  not  operating  their 
properties  and  have  not  operating  expenses,  operating  revenues, 
etc.,  in  which  to  include  those  items.  Furthermore,  the  cor- 
poration's income  account  is  based  on  the  average  net  railway 
operating  income  for  the  test  period,  which  theoretically  is 
complete  and  represents  the  complete  income  for  those  three 
years  including  the  lap-overs  from  the  beginning  of  the  period 
and  excluding  the  lap-overs  at  the  end  of  the  period.  An 
average  of  three  complete  years  makes  the  complete  income 
account  so  far  as  the  operating  accounts  included  in  the  stand- 
ard return  are  concerned.  Hence,  any  lap-overs  added  to  the 
income  account  or  deducted  therefrom,  cause  a  misstatement 
of  the  income  of  the  corporation. 

Another  reason  for  requiring  such  items  to  be  debited  and 
credited  to  the  income  account  of  the  corporation,  was  to 
offset  the  corresponding  debit  or  credit  to  the  income  account 
of  the  Administration,  so  that  when  the  two  accounts  were  put 
together,  these  lap-over  debits  to  expenses  and  credits  to 
revenues  would  disappear  in  the  consolidated  account,  off- 
setting each  other.  However,  I  have  learned  recently  that  it 
is  the  intention  of  the  Administration,  and  I  want  to  express 
my  commendation  of  their  proposed  practice,  not  to  charge 
and  credit  these  items  to  the  Administration  income  account, 
but  to  set  up  reserve  accounts  which  will  take  care  of  similar 
items  that  will  be  charged  and  credited  to  the  Administration 
after  Federal  control.  It  is  evident,  of  course,  that  at  the  end 
of  Federal  control  there  will  be  lap-overs  in  expenses  which 
must  be  charged  back  to  the  Federal  Administration,  and  lap- 
overs  in  revenues  which  must  be  credited  back  to  the  Admin- 
istration. If  these  items  are  put  into  the  income  account  of 
the  Administration  currently,  it  will  be  necessary  for  the  lap- 
overs  to  be  put  into  the  income  account  of  the  Administration 
a  long  time  after  the  close  of  Federal  control,  which  might 
prove  very  embarrassing  to  the  Administration  because  they 
will  run  into  millions  of  dollars.  It  seems  to  me  to  be  very 
wise,  good  business  and  sound  accounting  for  the  Administra- 
tion to  charge  and  credit  these  lap-over  items  to  a  reserve 
account  against  which  they  will  charge  and  credit  similar  items 
after  the  end  of  Federal  control. 

Corporate  Transactions. 

Certain  debits  and  credits  are  made  to  the  corporations  by 
the  United  States  Railroad  Administration  under  the  head  of 


12 

"Corporate  Transactions."  These  debits  and  credits  represent 
payments  or  receipts  by  the  Federal  officers  which  are  charge- 
able or  creditable  to  accounts  outside  of  those  comprised  in 
the  standard  return.  Such  debits  and  credits  should  be  care- 
fully examined  by  the  accounting  officers  to  determine  whether 
or  not  they  are  properly  chargeable  or  creditable  to  the  cor- 
porations, and  the  principle  to  govern  is  whether  or  not  the 
item  is  properly  chargeable  or  creditable  to  an  account  which 
is  not  embraced  in  the  standard  return. 

Verification  of  Accounts  with  U.  S.  Railroad  Administration. 

One  of  the  principal  duties  in  connection  with  corporate 
accounting  is  to  check  the  debits  and  credits  made  against  the 
corporation  by  the  U.  S.  Railroad  Administration,  to  deter- 
mine the  accuracy  of  the  lap-overs,  the  charges  for  additions 
and  betterments,  the  charges  against  corporate  transactions, 
and  in  fact,  all  debits  and  credits  made  against  or  in  favor  of 
the  corporation,  in  order  to  see  that  the  corporation's  revenues 
and  income  are  properly  protected  so  far  as  its  accounts  with 
the  United  States  Railroad  Administration  are  concerned.  Of 
course,  this  does  not  mean  that  the  corporate  accounting  officer 
is  to  neglect  in  any  way  whatever  his  usual  functions  with 
regard  to  strictly  corporate  transactions  which  are  not  handled 
by  the  Federal  Railroad  Administration,  but  this  section  of 
the  paper  is  to  lay  emphasis  on  the  necessity  of  checking  the 
accounts  with  the  Federal  Administration.  Not  only  should 
the  items  which  are  charged  and  credited  to  the  corporation 
be  thoroughly  audited  and  their  accuracy  completely  deter- 
mined, but  the  accounts  of  the  Federal  books  should  be  ex- 
amined with  a  view  of  determining  whether  or  not  omissions 
have  occurred,  which  would  affect  the  accounts  with  the  U.  S. 
Railroad  Administration. 

As  to  the  lap-over  items,  the  principal  work  will  be  in  the 
freight  and  passenger  departments,  and  that  work  diminishes 
a&  time  goes  on,  because  naturally  there  would  be  more  lap- 
overs  in  January,  1918,  than  in  any  subsequent  month,  and  so 
on  until  the  present  time,  the  lap-over  items  are  very  small. 
However,  as  most  of  the  railroad  corporations  did  not  get 
their  corporate  accounting  departments  on  a  working  basis 
until  the  latter  part  of  1918,  it  is  probable  that  the  work  of 
checking  the  lap-over  debits  and  credits  and  the  accounts  to 
determine  whether  omissions  have  occurred,  has  not  been  com- 
pleted to  date  by  very  many  carriers.  For  this  purpose,  first- 
class  accountants  should  be  employed.  Any  lack  of  ability  on 
the  part  of  the  accountants  checking  the  accounts  with  the 


13 

Government  may  result  in  heavy  losses  in  revenues  to  the  cor- 
poration. It  is  much  better  to  defer  the  work  to  some  later  day 
than  to  employ  inferior  accountants  for  that  kind  of  work.  In 
the  event  an  inferior  accountant  is,  through  an  error  in  judg- 
ment, employed  on  this  work,  he  should  be  taken  off  of  it  just 
as  soon  as  his  lack  of  capability  is  discovered.  In  such  a  case, 
no  squeamish  notions  should  be  allowed  to  interfere  with  the 
duty  of  the  accounting  officer,  which  is  to  protect  the  revenues 
of  the  corporation  which  he  serves.  It  is  unnecessary  to  point 
out  to  the  corporate  accounting  officers  the  details  of  this 
checking,  and  the  time  for  this  paper  is  too  short  for  that,  even 
if  the  necessity  existed.  The  paper  would  not  be  complete 
without  mentioning  the  subject  and  emphasizing  its  import- 
ance, and  the  necessity  for  the  most  thorough  auditing  by  com- 
petent accountants. 

Another  item  of  verification  which  will  not  diminish  during 
Federal  control  is  the  net  charge  to  additions  and  betterments 
made  to  the  property  by  the  United  States  Railroad  Admin- 
istration. The  accounting  rules  of  the  Interstate  Commerce 
Commission  describe  in  a  very  complete  and  accurate  manner 
the  divisions  between  operating  expenses  and  additions  and 
betterments.  So  many  additions  and  betterments  jobs  involve 
charges  to  operating  expenses,  such  as  renewal  of  bridges, 
renewal  of  buildings,  and  other  structures  and  appurtenances 
that  it  is  very  easy  to  charge  something  to  the  additions  and 
betterments  that  should  be  charged  to  operating  expenses. 
The  corporate  accountant  should  bear  in  mind  that  a  dollar 
charged  to  additions  and  betterments  on  a  job  approved  by  the 
corporation  means  that  the  corporation  must  repay  that  dollar 
to  the  United  States  Railroad  Administration,  and  that  a  dollar 
charged  to  operating  expenses  in  connection  with  additions 
and  betterments  jobs  will  be  borne  by  the  Administration ; 
therefore,  if  ten  dollars,  or  one  hundred  dollars,  or  one  thou- 
sand dollars  are  erroneously  charged  to  additions  and  better- 
ments instead  of  to  operating  expenses,  the  corporation 
thereby  suffers  a  direct  loss  for  which  the  accounting  officer  is 
directly  responsible. 

The  rules  of  the  Interstate  Commerce  Commission,  which 
under  the  contract  with  the  U.  S.  Railroad  Administration 
govern  the  separation  of  expenditures  between  operating  ex- 
penses and  additions  and  betterments,  should  be  restudied  very 
carefully  in  order  that  the  provisions  of  the  contract  may  be 
carried  out  strictly  and  that  the  corporation  will  not  suffer 
loss  of  revenue. 


14 

As  to  the  interest  on  additions  and  betterments,  pro  and 
con,  that  is  the  interest  charged  by  the  Administration  for 
advances  to  the  corporation  for  additions  and  betterments 
until  such  advances  are  repaid,  the  interest  allowed  to  the  cor- 
poration during  construction  as  a  part  of  the  cost  of  the  addi- 
tions and  betterments,  and  the  interest  on  such  expenditures 
creditable  to  the  corporation  from  the  time  the  facilities  are 
put  into  operation  until  the  end  of  Federal  control,  the  rules 
have  not  yet  been  completely  covered  by  general  orders  or  cir- 
culars of  the  Railroad  Administration.  It  seems  to  me  that 
the  fairest  and  least  expensive  way  of  computation  would  be 
to  compute  such  interest  quarterly.  The  compensation  to  the 
carriers  is  payable  quarterly,  and  interest  does  not  begin  to 
accrue  on  such  unpaid  compensation  until  after  the  end  of  the 
quarter  during  which  it  accrues ;  that  is  to  say,  the  compensa- 
tion payable  to  a  carrier  which  was  earned  in  January,  Feb- 
ruary and  March,  1918.  and  which  is  supposed  to  be  payable 
out  of  the  revenues  collected  by  the  Administration  during 
those  three  months,  if  unpaid,  does  not  begin  to  draw  interest 
until  April  1,  1918.  Theoretically,  it  is  out  of  this  compensa- 
tion that  the  Administration  pays  for  additions  and  better- 
ments, lap-over  items  and  corporate  transactions,  and  inas- 
much as  interest  does  not  begin  to  accrue  on  the  compensation 
or  on  lap-over  items  until  the  end  of  the  quarter,  it  would 
seem  perfectly  fair  and  reasonable  to  begin  to  accrue  interest 
on  expenditures  for  additions  and  betterments  against  the  cor- 
poration at  the  end  of  the  quarter,  instead  of  at  the  end  of  any 
one  month.  If  interest  on  advances  for  additions  and  better- 
ments and  interest  during  construction  should  begin  to  accrue 
at  the  end  of  each  quarter,  then  it  would  also  be  fair  to  begin 
to  accrue  interest  on  completed  jobs  at  the  beginning  of  the 
quarter  following  that  in  which  the  facilities  are  put  into 
operation.  That  is  to  say,  a  track  or  facility  which  was  com- 
pleted any  time  during  the  quarter  ended  June  30th,  would 
begin  to  bear  interest  on  its  cost  in  favor  of  the  corporation  on 
July  1st,  regardless  of  whether  the  facility  was  put  into  opera- 
tion in  April  or  in  June.  It  would  seem  that  the  payment  of 
compensation  quarterly  establishes  a  principle  which  should  be 
observed  in  connection  with  additions  and  betterments  expen- 
ditures both  in  favor  of  and  against  the  corporation.  Such  a 
method  would  also  simplify  the  computation,  thereby  reducing 
clerical  work. 

In  connection  with  additions  and  betterments,  it  is  recom- 
mended that  the  corporate  accounting  officers  keep  a  separate 


account  of  those  not  approved  by  the  corporation,  and  that  the 
U.  S.  Railroad  Administration  be  credited  on  the  books  of  the 
corporation  only  with  the  amount  that  has  been  approved  by 
the  corporation.  It  is  recommended  that  the  entire  expendi- 
tures, whether  approved  or  disapproved  by  the  corporation, 
should  be  charged  to  additions  and  betterments  because  the 
tracks,  structures,  etc.,  have  been  actually  added  to  the  prop- 
erty. However,  on  the  credit  side  of  the  balance  sheet  it  is 
recommended  that  those  expenditures  covering  jobs  that  are 
disapproved  by  the  corporation,  shall  be  carried  under  the  head 
of  Miscellaneous  Credits,  which  include  items  temporarily  car- 
ried under  that  head  until  sufficient  information  is  received  to 
determine  the  account  in  which  they  should  finally  rest. 

Up-Kecp. 

Another  item  which  may  receive  serious  attention  by  ac- 
counting officers  is  the  matter  of  up-keep  road  and  up-keep 
equipment.  The  contract  provides  that  the  Director  General 
shall  return  the  property  at  the  end  of  Federal  control  in  sub- 
stantially as  good  condition  as  at  the  beginning,  and  in  sub- 
stantially as  complete  equipment.  It  contains  a  proviso,  how- 
ever, that  if  the  Director  General  shall  expend  and  charge  for 
labor,  material,  depreciation  and  retirements  per  annum  as 
much  in  the  aggregate  as  was  expended  during  the  test  period 
by  the  corporation,  it  shall  be  taken  as  a  fulfillment  of  the 
obligation  to  return  the  property  in  as  good  condition  and 
complete  equipment  as  at  the  beginning  of  Federal  control. 
If  the  Administration  takes  advantage  of  this  proviso,  then  the 
matter  of  settling1  the  up-keep  section  of  the  contract  becomes 
largely  an  accounting  proposition,  in  which  the  corporate  en- 
gineers may  render  substantial  assistance.  If  the  Administra- 
tion does  not  take  advantage  of  this  proviso  but  stands  on  the 
original  proposition  that  the  property  shall  be  returned  in  as 
£Ood  condition  and  complete  equipment  as  at  the  beginning  of 
Federal  control,  then  the  up-keep  section  of  the  contract  be- 
comes a  matter  almost  exclusively  for  determination  by  the 
corporate  engineers  and  executive  officers  for  the  reason  that 
the  condition  of  the  property  at  the  beginning  and  at  the  end 
of  Federal  control  is  the  thing  to  be  determined,  and  that  must 
be  largely  by  actual  knowledge  of  the  conditions  and  by  engi- 
neering records. 

Property  Retired. 
Another  important  item  to  be  looked  after  is  that  of  prop- 


16 

erty  retired  and  the  proper  credit  to  the  corporation  therefor. 
Under  the  existing  orders  of  the  Interstate  Commerce  Com- 
mission, also  of  the  U.  S.  Railroad  Administration,  the  cor- 
poration is  credited  for  property  retired  on  the  basis  of  the 
original  cost,  while  the  contract 'provides  that  the  credit  shall 
be  on  the  basis  of  the  value  of  the  property  at  the  time  of  re- 
tirement. It  was  necessary  to  have  some  working  basis  so  as 
not  to  delay  the  accounting  for  property  retired  and  cause  a 
large  accumulation,  and  so  the  original-cost  basis  was  adopted 
temporarily  until  some  other  basis  is  substituted.  The  matter 
has  received  much  consideration,  but  has  not  been  finally 
determined.  Each  accounting  officer  should  see  that  this 
matter  of  the  proper  credit  for  property  retired,  is  in  the  end 
allowed.  As  depreciation  is  only  an  estimated  amortization 
of  the  retirement  charge,  whatever  allowance  or  equation  is 
made  in  connection  with  retirements  should  also  be  made  in 
connection  with  the  charges  for  depreciation  of  property  still 
in  existence.  Of  course,  in  the  case  of  property  that  has  been 
retired,  the  amount  that  is  finally  determined  upon  as  the 
retirement  credit  to  the  corporation,  will  be  reduced  by  the 
amount  previously  credited  for  depreciation,  and  the  final 
credit  will  be  correct,  but  as  to  depreciation  on  property  which 
has  not  been  retired,  some  equation  factor  will  undoubtedly  be 
found  to  increase  that  credit  in  substantially  the  same  ratio  that 
the  credit  for  retirements  is  increased.  This  equation  of  re- 
tirements and  of  depreciation  enters  into  the  up-keep  proposi- 
tion which  has  not  been  determined  as  between  the  corpora- 
tions and  the  Railroad  Administration,  but  the  accounting 
officers  should  be  careful  to  see  that  promptly  upon  such  deter- 
mination, the  accounts  are  properly  adjusted  from  the  original- 
cost  basis  on  which  the  credit  was  previously  written,  to  the 
agreed  basis. 

In  this  connection  it  is  suggested  that  careful  attention 
should  be  given  to  the  credit  for  retirements  just  prior  to  and 
subsequent  to  the  beginning  of  Federal  control.  As,  for  ex- 
ample, suppose  a  building  was  retired  in  the  accounts  of  a 
carrier  in  December,  1917,  but  the  actual  work  of  constructing 
the  new  building  was  not  commenced  until  January,  1918. 
If  such  instances  are  not  carefully  watched,  the  corporation 
will  be  charged  with  the  entire  cost  of  the  new  building  as 
additions  and  betterments,  and  will  not  receive  credit  by  the 
Railroad  Administration  for  the  value  of  the  old  building 
which  was  retired.  The  reverse  situation  might  occur ;  that  is 
to  say,  the  construction  of  a  new  building  might  be  commenced 


17 

in  December,  1917,  and  be  nearly  completed  during  that  month, 
while  the  entries  covering  the  retirement  of  the  old  building 
might  not  be  made  until  January  or  February,  1918,  at  the 
time  the  new  building  is  completed.  Owing  to  the  fact  that, 
especially  in  the  northern  part  of  the  United  States,  not  much 
construction  work  would  be  in  progress  at  the  first  of  the 
calendar  year,  probably  not  many  of  such  cases  existed, 
but  it  is  recommended  that  each  accounting  officer  should  ex- 
amine carefully  all  work  in  progress  at  about  that  time  to 
determine  that  the  credits  for  retirements  are  properly  made, 
either  prior  to  or  during  Federal  control. 

From  time  to  time  during  the  period  of  Federal  control, 
property  will  be  abandoned  or  retired,  and  not  replaced.  It  is 
important  that  the  accounting  officer  should  see  that  a  proper 
record  is  made  of  all  such  abandoned  or  retired  property 
which  is  not  replaced,  in  order  that  same  may  be  made  good 
at  the  end  of  Federal  control  and  that  the  corporation  mav 
receive  the  proper  credit  for  such  property  which  is  abandoned 
or  retired,  which  is  not  returned  at  the  end  of  Federal  control. 
It  is  unfortunate  that  the  Railroad  Administration  does  not 
require  an  authority  for  the  abandonment  of  every  piece  of 
property,  because  such  authority,  if  required,  would  provide  a 
good  record  of  all  property  abandoned.  This  makes  the  duty 
of  the  corporate  accounting  officer  a  little  more  difficult  to 
perform  with  regard  to  property  abandoned,  but  does  not  re- 
lieve him  from  the  responsibility  of  looking  after  it  in  a. 
thorough  manner. 

Depreciation. 

Another  point  for  the  accounting  officer  to  bear  in  mind  is 
that  the  amounts  charged  for  depreciation  during  the  period 
of  Federal  control  should  be  exactly  the  same  as  those  charged 
during  the  test  period.  In  other  words,  if  a  railroad  charged 
4%  per  annum  for  depreciation  during  the  entire  test  period 
the  Administration  should  charge  4%  per  annum  during  the 
entire  period  of  Federal  control  on  all  equipment  turned  over 
to  the  Administration  on  December  31,  1917.  If  the  rates 
were  changed  during  the  test  period,  then  a  proper  average, 
of  the  rates  during  the  test  period  should  be  ascertained  and 
that  average  used  during  the  period  of  Federal  control.  The 
Administration  has  fixed  4^%  as  the  rate  to  be  charged 
during  Federal  control  on  all  equipment  acquired  by  the  car- 
riers during  Federal  control.  Letters  of  the  Director  General 


18 

dated  November  25,  1918,  and  December  3,  1918,  state  clearly 
that  the  amounts  charged  for  depreciation  are  creditable  to  the 
carrier,  and  may  be  applied  on  payments  for  equipment  ac- 
quired during  the  period  of  Federal  control,  or  for  the  pay- 
ment of  equipment  notes  issued  prior  to  Federal  control  and 
payable  during  Federal  control.  Therefore,  the  charge  for 
depreciation  on  equipment  during  the  Federal  control  period 
is  a  direct  credit  to  the  corporation,  and  it  is  important  to  see 
that  the  rates  and  computations  thereof  are  made  with  accu- 
racy and  on  the  right  bases. 

Miscellaneous  Rents. 

Another  point  to  be  looked  after  by  the  corporate  account- 
ing officer  is  the  matter  of  miscellaneous  rents  for  right  of  way. 
for  buildings  and  for  other  purposes.  Any  such  rents  that  were 
during  the  test  period  properly  creditable  to  the  income  ac- 
count of  the  carrier  outside  of  the  accounts  included  in  the 
standard  return,  should  be  collected  in  cash  by  the  corporation 
and  the  money  put  into  the  corporate  treasury.  In  some  cases 
this  may  involve  a  revision  of  the  standard  return.  During 
the  test  period  some  roads  credited  miscellaneous  rents  to  the 
revenue  account,  No.  142,  which  according  to  the  rules  of  the 
Interstate  Commerce  Commission,  were  creditable  to  income 
account  No.  510.  In  such  cases,  the  standard  return  will  be 
reduced  by  the  U.  S.  Railroad  Administration  and  such  rents 
during  the  period  of  Federal  control  should  be  paid  over  to 
the  corporate  treasurer  in  cash.  It  is  the  duty  of  the  account- 
ing officers  to  see  that  these  rents  are  properly  accounted  for. 
to  the  end  that  the  revenues  of  the  corporation  are  fully  pro- 
tected. 

Taxes. 

Another  item  to  which  to  give  careful  attention  is  the  matter 
of  taxes.  The  accounting  officer  should  see  that  all  taxes 
(exclusive  of  war  taxes)  which  were  charged  to  Railway  Tax 
Accruals  during  the  test  period  and  therefore,  deducted  in 
arriving  at  the  net  railway  operating  income  for  the  test  period, 
should  be  paid  and  assumed  by  the  U.  S.  Railroad  Administra- 
tion. In  order  that  the  corporation  revenues  may  be  properly 
protected,  a  careful  scrutiny  of  the  classes  of  taxes  that  were 
charged  to  Railway  Tax  'Accruals  during  the  test  period, 
should  be  made  and  then  all  similar  payments  (not  war  taxes) 
during  the  Federal  control  period  should  be  charged  by  the 


19 

Railroad  Administration  against  its  own  expenses,  and  not 
against  the  corporation.  The  railroad  corporations  pay  so 
many  different  kinds  of  taxes  that  unless  this  matter  is  watched 
very  carefully,  the  corporation  may  suffer  a  loss.  In  this 
connection  I  might  say  that  whenever  a  voucher  is  presented 
tc  me  for  approval,  whether  for  taxes  or  anything  else  which 
might  have  been  within  the  accounts  comprising  the  standard 
return,  I  require  a  certificate  by  an  accountant  in  my  office  to 
the  effect  that  similar  items  during  the  test  period  were  not 
charged  against  the  accounts  embraced  in  the  standard  return. 
This  necessitates  an  investigation  in  connection  with  each  indi- 
vidual payment  and  I  believe  is  a  good  way  of  safeguarding 
the  revenue  of  the  corporation. 

Material  and  Supplies. 

Another  matter  in  which  the  accounting  officer  is  directly 
interested  is  the  inventory  of  material  and  supplies  on  hand  at 
December  31,  1917,  and  turned  over  to  the  Railroad  Admin- 
istration. The  contract  provides  that  at  the  end  of  Federal 
control,  such  material  shall  be  replaced  in  like  quantity,  re- 
gardless of  whether  the  prices  used  in  the  original  inventory 
may  be  more  or  less  than  those  prevailing  at  the  end  of  Fed- 
eral control.  Iti  other  words,  the  U.  S.  Railroad  Administra- 
tion contracts  to  return  as  many  hundred  pounds  of  spikes  and 
as  many  tons  of  rails,  as  many  pieces  of  timber  of  the  various 
kinds,  etc.  Therefore,  it  is  important  that  the  inventory  should 
be  very  carefully  preserved,  and  no  sheets  thereof  lost  or  mis- 
placed, in  order  that  at  the  end  of  Federal  control,  the  proper 
amount  of  material  and  supplies  may  be  turned  over  to  the 
corporation  by  the  Railroad  Administration,  or  otherwise 
made  good  to  the  corporation.  Unless  this  matter  is  very  care- 
fully watched,  the  corporation  may  suffer  a  severe  loss. 

Furniture,  Fixtures,  Tools,  Etc. 

In  addition  to  the  inventory  of  material  and  supplies,  then? 
should  also  be  an  inventory  of  furniture,  fixtures,  tools,  etc.. 
that  have  been  charged  out  but  are  in  existence,  in  order  to  see 
that  at  the  end  of  Federal  control,  all  such  furniture,  fixtures, 
tools,  office  supplies,  etc.,  are  returned  to  the  carrier;  as,  for 
example,  if  an  office  was  equipped  with  100  desks  of  a  certain 
type,  they  should  all  be  returned  at  the  end  of  Federal  control. 
If  only  90  desks  are  in  the  office  at  the  end  of  Federal  control, 
a  proper  record  of  the  shortage  of  10  desks  should  exist,  so 


20 

that  the  Railroad  Administration  may  be  called  upon  to  make 
good  the  10  desks  which  have  disappeared. 

Price  of  Fuel,  Oil,  Etc. 

Another  point  to  be  watched  is  the  adjustment  of  prices  of 
fuel,  oil,  etc.,  in  connection  with  contracts  made  under  which 
the  corporation  obtained  reduced  prices  during  the  test  period. 
The  standard  contract,  paragraph  8,  section  4,  provides  that 
the  U.  S.  Railroad  Administration  shall  be  substituted  for  the 
corporation  in  such  contracts  in  order  that  the  Administration 
shall  have  the  benefit  during  the  period  of  Federal  control  that 
the  corporation  had  during  the  test  period.  The  contract  con- 
templates that  such  advantage  during  the  period  of  Federal 
control  shall  be  only  to  the  extent  necessary  to  offset  any 
increases  in  the  standard  return  growing  out  of  the  reduced 
prices  during  the  test  period.  Therefore,  it  is  incumbent  upon 
the  accounting  officer  to  see  that  the  reduction  in  prices  during 
the  period  of  Federal  control  is  sufficient  and  only  sufficient  to 
offset  the  increase  in  the  standard  return  due  to  such  reduced 
prices  during  the  test  period.  If  this  matter  is  not  carefuly 
watched,  an  unjust  settlement  which  may  cause  a  loss  to  the 
corporation  or  the  U.  S.  Railroad  Administration,  will  result. 

Corporate  Books  to  Harmonise  With  Federal  Books. 

As  to  keeping  the  books  of  the  corporation  and  of  the  Fed- 
eral control,  it  is  recommended  that  they  be  kept  in  complete 
harmony ;  that  is  to  say,  that  an  account  on  the  corporate  books 
shall  show  exactly  the  same  balance  due  to  the  Administration 
as  the  charge  shown  on  the  Federal  books  against  the  corpora- 
tion, and  vice  versa.  If  the  two  sets  of  books  are  kept  in 
harmony  in  that  manner,  any  statements  which  go  to  the  ex- 
ecutive officers  or  to  Washington,  from  either  set  of  books, 
will  always  be  in  harmony  and  prevent  confusion  and  useless 
discussion.  It  may  be  that  the  Federal  Auditor  will  make  an 
errnoneous  charge  against  the  corporation,  but  my  recommen- 
dation would  be  that  the  corporation  also  record  such  erro- 
neous charge  in  order  to  keep  the  books  in  harmony,  and  then 
call  the  matter  to  the  attention  of  the  Federal  Auditor,  who 
will  make  proper  correction  in  his  books  and  concurrently  the 
same  correction  should  be  made  in  the  corporate  books. 

Co-Operation  of  Corporate  and  Federal  Accounting  Officers. 
Throughout  this  paper,  reference  has  been  made  to  the  pro- 


21 

tection  of  the  revenues  of  the  corporation.  This  has  been  done 
for  the  reason  that  the  subject  assigned  to  me  was  "Corporate 
Accounting  during  Federal  control."  The  accounts  between 
the  U.  S.  Railroad  Administration  and  the  corporations  involve 
hundreds  of  millions  of  dollars  resulting  from  transactions 
which  must  be  recorded  on  the  Federal  books.  Hence,  the 
Federal  accounting  officer  is  interested  in  protecting  the  reve- 
nues of  the  corporation  to  the  extent  of  seeing  that  all  his 
accounts  with  the  corporation  are  recorded  with  the  great- 
est degree  of  accuracy.  From  my  personal  knowledge  of  the 
honesty  and  fair  dealing  of  the  railroad  accounting  officers  of 
the  United  States,  both  Federal  and  corporate,  I  know  that 
during  Federal  control  the  Federal  accounting  officers  have 
been  diligent  and  faithful  in  their  efforts  to  record  all  trans- 
actions with  the  corporations,  with  the  greatest  degree  of  ac- 
curacy and  thus  to  render  substantial  assistance  in  protecting 
the  revenues  of  the  corporation.  If  any  Federal  accounting 
officer  has  intentionally  deprived  the  corporation  of  revenues 
to  which  he  believed  it  was  justly  entitled,  whether  through 
erroneous  debits  or  through  omission  of  proper  credits,  then 
such  accounting  officer  is  unworthy  of  his  profession  and  is 
unworthy  of  membership  in  this  great  Association,  but  I  will 
not  believe  that  such  an  one  exists. 

Director  of  Accounts,  U.  S.  Railroad  Administration. 

While  in  this  paper  I  have  criticised  a  few  of  the  accounting 
provisions  of  the  Administration,  it  is  not  intended  to  create 
the  impression  that  I  think  the  Administration  has  a  weak 
accounting  department.  On  the  contrary,  I  think  it  has  a 
strong  accounting  department,  administered  in  its  details  by 
men  of  recognized  accounting  ability.  It  would  be  a  miracle  if 
?  11  of  the  accounting  provisions  of  the  Administration  were 
beyond  criticism.  I  also  want  to  pay  a  tribute  to  Director 
C.  A.  Prouty  at  the  head  of  the  Division  of  Accounts  of  the 
U.  S.  Railroad  Administration,  in  his  administration  of  that 
department.  The  magnitude  of  his  duties  prevents  him  from 
giving  attention  to  details,  but  the  policy  of  his  administration 
has  been  broad  and  fair-minded. 

Conclusion. 

Many  other  things  could  be  said  with  reference  to  corporate 
accounting  during  Federal  control;  this  paper  has  attempted 
to  touch  simply  a  few  of  the  high  spots  as  they  appeared  to 


22 

the  writer.  It  would  be  an  insult  to  the  intelligence  of  the 
many  experienced  accounting  officers  if  I  should  attempt  to  go 
into  the  details  and  try  to  touch  upon  every  phase  of  this  sub- 
ject during  Federal  control.  If  my  paper  has  resulted  in  sug- 
gesting trains  of  thought  which  may  be  of  benefit  to  the  cor- 
porations and  to  the  U.  S.  Railroad  Administration,  the  effort 
has  been  amply  repaid. 


NOV  7   1947 


LD  21-lOOw 


.12;46(A2012S16)4120 


PAT.  JAI.  2 1,1008 


41545J 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


